Possible H-1B Visa Reform on the Horizon will Impact the ARM Industry

February 24th, 2017

Human capital is a crucial aspect of efficient and innovative business processes. One method of gaining top talent for multinational corporations is through the H-1B visa program, which allows foreign employees to work in the United States for a specified time in certain specialties. Businesses employing foreign workers can expect some type of reform in the near future considering the Trump Administration’s recent actions. Some examples include his recent travel ban on several Middle Eastern countries and proposal for a wall between the U.S. and Mexico. Both of these efforts are to control the influx of immigrants into the United States, albeit for different reasons, with the latter partially signaling his goal of protecting domestic jobs.

To succeed in this initiative, Trump also mentioned providing tax cuts for domestic firms and tax increases for firms that offshore jobs. Recently, the Trump Administration has discussed changes to various visa programs, and a couple of Californian Congressmen proposed bills targeted at further limiting the H-1B visa program, with one bill only awarding H-1B visas to companies willing to pay the highest salaries and the other simply raising the salary floor from $60,000 to over $100,000. If these plans, or something alike, reach fruition, they may have adverse effects on the OBS and ARM industries, considering that international talent generally boosts economic growth, especially in certain sectors, and increases in population lead to absolute increases in volume and value of consumption.

There are multiple industries that particularly benefit from the H-1B visa, especially the science, technology, engineering, and medical (STEM) industries. This makes sense as these fields require the most specialization and expertise. Established in 1990, the H-1B visa fills in the short supply and the skills gap for top talent. The H-1B visa is operated using a lottery system with an effective cap of 85,000 workers, 20,000 of which are allocated for U.S. master program graduates, and the remaining 65,000 for the traditional prospective employees. The majority of the top H-1B filers are global outsourcing firms that utilize foreign workers for U.S. companies so if a change similar to the Congressmen’s proposed bills occurs, these OBS agencies may actually see increased costs. According to a CNNtech article, demand for the visas increased every year and currently stands at three times more than the quota. Additionally, the number of foreign-born employees grew at a 1.41% compounded annual growth rate (CAGR) since 2007, amount to nearly 26 million employees in January 2017 as shown by the graph below. The only exception to the growing number of foreign-born employees was during the Great Recession, but this was due to the overall employment climate and economy decline.

The STEM industry and innovations propel economic growth with research supporting that scientists and engineers are responsible for 50% of long-run U.S. productivity growth. According to research from STEM Workers, H-1B Visas, and Productivity in US Cities, the expansion of the information and communication technologies have remarkably increased college-educated workers’ productivity and wages. Additionally, the journal’s authors found that a rise in foreign STEM growth by one percentage point of total employment increases wage growth of college-educated natives by seven-to-eight percentage points. Between 1990 and 2010, the inflows of foreign STEM workers accounted for approximately 30%-50% of aggregate productivity growth in the U.S., consistent with the analysis of science and engineering contributions to productivity growth. In fact, by 2010 foreign-born individuals represented about 16% of total U.S. employment and accounted for greater than 27% of college-educated STEM workers.

Studies also indicate that STEM workers produce more wage increases for the college-educated and non-college-educated natives. In fact, a one percentage point increase in STEM as a share of employment resulted in a four percentage point increase in college-educated natives wage growth and about a 2.4 percentage point wage growth for non-college-educated natives. As a result, foreign-born individuals are continuously over-represented in STEM jobs and growth of STEM jobs in the U.S. Silicon Valley is a perfect example of this phenomenon. It is the world’s most attractive tech hub for talented foreigners where some of the nation’s most innovative ideas come to fruition. Furthermore, some of America’s most successful start-up companies valued at $1B or more are started or managed by immigrants. Restricting the number of foreign employees can limit the future entrepreneurs and innovators that the U.S. needs to be a key global competitor.

Due to increased immigration restrictions, the skills gap will expand and firms may be forced to employ individuals who do not fit the job requirements, further hampering business processes. Between 1990 and 2010, the United States benefitted an overall net worth of $50 billion for the native population as a result of immigration. This might seem miniscule in an $18 trillion economy, but it’s still $50 billion that America would not otherwise have available to fund projects in other areas such as education, health, or infrastructure.

One criticism of the H-1B visa program is that outsourcing firms exploit the program and pay the foreign employees less than Americans for the same job. Senators Chuck Grassley and Dick Durbin reintroduced further reform for the visa program to revert from a lottery system, and instead give preference to international students educated in the U.S. In doing so, the reform may help eliminate the potential outsourcing firms who may exploit the program. However, other companies that rely on the program are actually willing to pay more to acquire the best and the brightest. The annual lottery system is one of the fallbacks of the H-1B visa program as it prevents firms and organizations from hiring based on business needs. Furthermore, the H-1B visa program does not award employment based on merit, including skill level, level of education, field of study, or priority over where the skill set is most needed. This is a major restraint considering the top three fields that receive visa requests are for computer-related occupations (computer systems analysts, software developers, and computer programmers), which account for over 50% of all H-1B occupations. As previously mentioned, the technology sector and its innovations make a huge impact to overall economic progress.

Retaining highly specialized workers should more effectively boost economic growth, leading to many positive ARM-related implications, such as greater consumption and consumer confidence in the economy inducing individuals to take on more debt. With higher amounts of debt, there’s a greater likelihood of delinquencies, increasing ARM-related opportunities. Conversely, significant economic growth may increase interest rates, which may negatively impact the ARM industry as the cost of debt rises, meaning less borrowing and spending. Nonetheless, a thriving economy led by innovative, diverse individuals creates favorable economic conditions for businesses and mitigating the ease of hiring foreign-born employees may stagnate national growth, productivity, and technological developments.

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